Given the increase in non-performing loans to microenterprises that currently exists in the regulated and non-regulated financial system, it is necessary to adopt prudential policies to reduce the risk of over-indebtedness. In this regard, good practices recommend the adoption of policies before and after loan disbursement.
BEFORE DISBURSEMENT
Number of financial institutions the client works with
Considering that the greater the number of credit institutions the risk of default increases, and that many Microfinance Institutions - MFIs grant credits without evaluating the destination for working capital, it would be advisable to reduce the maximum number allowed to access a loan, both for new and returning customers.
A prudent number of maximum allowed entities could be three (3), even considering the entity granting the credit. The same cap would apply to the sum of entities of the holder and spouse.
Level of internal escalation of the client with the MFI
Many unregulated entities have yet to implement this good old practice. Therefore, it is common for clients to increase the amount of their indebtedness disproportionately from one loan to another, increasing the risk of default.
The correct thing to do would be to define cut-off amounts, which will depend on the amounts historically disbursed in each entity.
For example, the cut could be S /.2,000. Thus we have that for amounts less than S /.2,000, in a second loan we could grant up to double (up to 100% more); and for amounts greater than S /. 2,000, in a second loan we could grant up to 50% more.
Level of escalation of the client in the financial system.
It consists of taking into account the total indebtedness of the client in the financial system and setting a maximum limit to lend, with respect to this total.
For example, to lend up to 50% of the total owed in the system, according to the latest report from the Risk Center.
The Equity Debt Ratio. The ratio must consider the impact of the new debt to be granted. A common mistake is to consider a standard ratio for all economic activities, without considering that there are differences between each of them.
My suggestion is to define equity debt ratios by economic activity.
The Limit Quota Ratio or Free Quota Ratio
A serious mistake is to consider this ratio as a determining factor for the granting of working capital loans, when it should only be used to evaluate the payment capacity for loans with a fixed asset destination.
It is advisable to define maximum ratios by credit range.
Loan Ratio for Working Capital
The correct way to measure the maximum amount to be lent for working capital is by relating the Loan for Working Capital to Current Assets, with a Limit of 1.5 times the Net Working Capital (read article: http://elanalista.com/ ? q = node / 230).
Minimum Amortization.
The healthy thing would be for the client to cancel the entire credit, before granting a new one. However, it is common practice in the Financial System to renew and extend credit before its cancellation. Some renew the credit for the payment of 50% of the capital or agreed installments, others at 30% and the most risky, do not take into account any criteria.
My suggestion is to be conservative and consider the maximum possible repayment, in order to know the real payment capacity of the client, as well as moral capacity.
More than one will affirm that the adoption of these policies will affect the business, which is possible if we continue working with the same universe of clients, when it is advisable to search for new markets with unbanked clients, and not continue working with same customer base, increasing loans by increasing the average loan balance.
AFTER DISBURSEMENT
The following is recommended:
Preparation of Quarterly Reports on Over-indebtedness, divided into seven (07) parts:
- Portfolio Quality Index. Level of internal escalation of the client with the MFI. Level of escalation of the client in the financial system. Equity Indebtedness. Quota Limit Ratio. Analysis of the Over-indebted Portfolio. Follow-up of credit campaigns
In order to evaluate the compliance and effectiveness of the implemented policies.
Implementation of early warning signs
Which are a series of indicators, whose purpose is to inform about the possible risk of over-indebtedness of the portfolio, so that the respective control measures are taken.
Among the control measures are the visits to clients considered as over-indebted, in charge of the Risk Unit in coordination with the business staff. These visits will be carried out in order to take corrective actions or improvements, as the case may be.
A final recommendation is for the Credit Unions, which, although they are not obliged to implement the mandatory regulations for supervised entities, should do so as a prudential measure against the risk of over-indebtedness.
